Life Insurance Can Secure Support Payments

Signed document representing securing payment in life insurance policies in divorce cases

Written on behalf of Shariff & Associates

After a divorce or separation one party may have an obligation to make spousal support payments. So what happens if the support payor dies while the obligation is outstanding? Courts can require a payor to obtain life insurance as security to ensure the obligation will be covered. This resolution protects the recipient beneficiary as the insurance proceeds are available to cover outstanding support payments. However, there are some considerations before courts will require a party to obtain insurance.

Insurance Policy Can Ensure Support Obligation is Met

In a 2002 case from Nova Scotia, Murphy v. Murphy, the respondent raised the issue of security for a support obligation in circumstances where the payor admitted he repeatedly failed to make the required payments and where arrears continued to accrue. In those circumstances, the judge decided that an order for security was appropriate. Looking to the Divorce Act, the judge found that it gave the Court “broad authority to tailor appropriate support and security regimes based on a case-by-case analysis.”

After looking at the case law, it was clear that orders for a payor to maintain life insurance as security were being granted on a routine basis. In one case, there was a traditional marriage where the wife had foregone employment opportunities to care for their children. However, the payor failed to make support payments. Additionally, the wife’s employment prospects after the breakdown of the marriage were limited due to an illness, but Justice Kelly did not find this was a distinguishing factor. Instead, it was determined that security should be granted in any case when it is reasonably warranted. In the case of Murphy, the payor had persistently neglected to make payments and it was not unreasonable to think he might continue to fail in meeting that obligation. Security through a designation of the respondent as the beneficiary to a life insurance policy was warranted.

Court Can Order a Party to Obtain Insurance as Security

The question of whether a court can order a party to obtain a life insurance policy to secure their support obligations was at issue in Katz v. Katz. The respondent argued it would be unfair to enforce an obligation that he obtain insurance. The Court of Appeal looked at a prior decision in Feinstat v. Feinstat, in which the Court held that, while section 34 of the Family Law Act (also referred to as the “FLA”) permits a court to order a spouse who has insurance to designate an individual as a beneficiary, it does not enable a court to require that a spouse obtains insurance. However, the Court determined that the principle in Feinstat that the respondent relied on was incorrect. Section 34(1) lists specific powers that the court has, which includes permitting a court to make an interim or final order “requiring that a spouse who has a policy of life insurance as defined under the Insurance Act designate the other spouse or a child as the beneficiary irrevocably.”

The Court accepted that while there was no section that explicitly authorized a court to order a spouse to obtain life insurance, courts have discretion to make an order under 34(1)(k) “requiring the securing of payment under the order, by a charge on property or otherwise.” Further, because a support order made under the Family Law Act can be binding on the payor’s estate, section 34(1)(k) is “broad enough to permit a court to order a spouse to obtain an insurance policy to secure payment of the order following the payor spouse’s death”. Such a requirement on the payor to maintain life insurance ensures the insurance proceeds are available to discharge the support obligation.

The situation under the Divorce Act is different, as there is no provision that lists the court’s powers on an application for support. Yet, it is generally accepted that courts have a discretionary power to impose terms that would secure the payment of a support order. Consequently, both the Family Law Act and the Divorce Act enable courts to order a spouse to obtain insurance to secure the payment of support. However, the Court of Appeal cautioned that in circumstances where the payor does not have an existing insurance policy in place, courts must be careful in requiring the payor to obtain insurance. The Court noted it is desirable to have evidence “of the payor’s insurability and of the amount and cost of the available insurance.” Additionally, courts must carefully consider the amount of insurance that is appropriate, indicating that it should not exceed the total amount of support that is payable. Finally, the amount of insurance to be maintained should decline over time as the duration of the support award diminishes.

Courts Weigh Factors to Decide if Security is Warranted

In Tonogai v. Tonogai, the parties agreed to a temporary order in which the respondent would pay over $4000 per month in spousal support. However, the applicant sought an order that the respondent maintain life insurance with a minimum value of $500,000 and designate the applicant as the beneficiary as security for his support obligation. The judge indicated that the jurisdiction to require security for support payments could be located in section 15(2)(3) for cases proceeding under the Divorce Act. That section enables courts to make an order and “impose terms, conditions or restrictions in connection with the order as it thinks fit and just.” Justice Bale acknowledged that there were clear benefits to ordering security through the use of life insurance policy since it would protect “a pool of money for the support recipient from which to pay any outstanding support obligation.” In some instances, the order can be binding on the payor’s estate, meaning the funds “will not be subject to competing claims from creditors in the event of the payor’s death.”

Despite these benefits, the Court recognized that there are situations where life insurance may not be available to a payor, or it may be cost prohibitive. In this case, the respondent did not have life insurance, except for a policy for his business which could not name the applicant as a beneficiary. He also argued that at his age, life insurance would be cost prohibitive. Justice Bale noted that in Katz, the Court of Appeal determined that courts have jurisdiction to order a payor to obtain a new life insurance policy to secure a support obligation, but that courts need to be cautious in imposing the obligation. Here, there was limited information in front of the Court pertaining to the respondent’s insurability. Thus, the Court was unable to assess the applicant’s request in accordance with the principles set out in Katz. Although further evidence was needed to be able to assess whether the request was reasonable, the judge found that in the interim, the respondent’s net worth was sufficient to secure his payment obligation. It was also important that the parties had already agreed that any support owing would be binding as a first charge against his estate. Moreover, the applicant also remained the sole beneficiary of the respondent’s registered retirement savings plan (RRSP) that was valued at $140,000, and that designation would be maintained pending the final determination of the issue. This arrangement provided sufficient security for the applicant’s claim on a temporary basis.

Obtaining Insurance as Security Is Not Always Warranted

Courts can order a support payor to obtain life insurance as security for the payment obligation. This helps ensure there are funds available for the support recipient. However, courts need to be careful in requiring a payor to obtain insurance and will ensure the amount of insurance is appropriate.

The Family Law Lawyers at Shariff & Associates Provide Trusted Advice on Child and Spousal Support Payments

The knowledgeable separation and divorce lawyers at Shariff & Associates understand the complex issues that can arise as a result of the breakdown of a relationship, such as parenting disputes, property division, and child and spousal support obligations. Our compassionate lawyers understand that after a separation, parties may find themselves in uncertain financial situations, therefore, support payments can provide crucial assistance to ensure the parties can move on. This is why we work closely with clients to ensure they can make informed decisions and receive the support payments they are entitled to. To schedule a confidential consultation with one of our family lawyers, call us at 905-591-4545 or contact us online.